A Way For Turkey’s Erdogan To Have His Cake And Eat It Too

December 3, 2021

It’s no secret that Recep Tayyip Erdogan aspires to become the sultan of Turkey. But there is one huge obstacle that might block Erdogan’s path: the Turkish lira. The lira is one of the world’s junk currencies. Indeed, with each passing day, the lira hits new lows against the U.S. dollar, and with that, inflation in Turkey soars. Today, I measured Turkey’s annual inflation rate at 79.6% per year. The lira hangs like the sword of Damocles over Erdogan.

For Erdogan, low interest rates are a fatal attraction. Just what is the source of this attraction? To answer that question, we must understand Islamic finance. It’s replete with theories about the evils of interest rates — theories embraced by Erdogan. Indeed, as he once clearly put it, interest rates are the “mother of all evil.” Yes, President Erdogan’s economic ideas are fundamentally rooted in charismatic, medieval texts that are far removed from the real world of today, or even yesterday. But as long as the lira is issued by a central bank with discretionary powers, “low” rates will result in a weak and vulnerable lira and relatively high and variable inflation rates. In other words, as long as Turkey’s central bank possesses discretionary monetary powers, Erdogan faces a dilemma.

President Erdogan could easily remove that dilemma by turning Turkey’s central bank into a currency board. Erdogan should model a Turkish currency board after the currency board I designed and installed in Bulgaria in 1997. It smashed hyperinflation, and within 18 months, reduced money-market interest rates to 2.43%. Most importantly, it imposed a hard budget constraint on Bulgaria’s fiscal authorities. With a Turkish currency board, the lira would be tied to a stable anchor (the dollar, euro, or gold) at a fixed exchange rate. The lira would be fully backed by anchor currency reserves. With a currency board, the lira would become an international currency that holds its purchasing power over time. If Erdogan wants to supplant Ataturk’s legacy and become sultan, there is only one solution – a currency board.


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